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I’m (thankfully) finding myself on the road much more these days, visiting clients, colleagues, and family, and am struck by how similar investing is to being behind the wheel of a car. Like driving, investing requires a careful consideration of many visible and invisible risks, looking both ahead and behind us when interpreting economic data, and avoiding hard turns of the wheel unless necessary. It is the case today that we are traveling down a winding road and have better visibility of our destination nine to twelve months ahead of us, but not necessarily clarity on how we will get there. Elevated inflation, supply chain challenges, and policy uncertainty could throw up additional roadblocks in the months ahead, but we continue to assess the longer-term outlook as constructive. We retain an overweight to equities and have modestly reduced portfolio risk by trimming our overweight allocations to commodities and high-yield municipal bonds in favor of an above-benchmark tactical cash position. Effectively, we are sticking with our optimistic expectations for post-pandemic growth and earnings while at the same time hedging against the asset price disruption that higher inflation could bring to both stocks and bonds.

Economic whiplash

The economy threw on the brakes in the third quarter, thanks to the Delta variant of COVID-19. Gross domestic product (GDP) clocked in at just 2.0% quarter-over-quarter on a seasonally adjusted basis, compared to 6.7% in the second quarter,1 as personal consumption flatlined. New job creation disappointed despite record numbers of job openings. Growth in other parts of the world, including China, decelerated at a similar rate as mobility restrictions and plant shutdowns stymied economic activity.

Source: Bureau of Economic Analysis.

Please see important disclosures at the end of the article.

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